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A Double-Digit Rally Could Be in the Cards for This Gaming Stock

Gaming revenue continues to increase in the United States and around the world. In the U.S., it rose nearly 5% in 2012 from 2011 to more than $37 billion, according to the American Gaming Association's (AGA) latest numbers. 

Two decades ago, only six states legalized commercial casino gaming. Today, that number has swelled to 23. Thirty-four percent of Americans have visited a casino in the past year, according to the AGA's latest report. And 39% of those visiting casinos are in the young adult category of 21 to 35 years old, debunking the notion that most casino goers are elderly. Even the puritanically based belief of the evils of gambling has hit the skids with 85% of Americans finding casino gaming socially acceptable.  

This growth isn't even taking into consideration the 420-plus Native American casino operations in the United States. These casinos generated $28 billion in gaming revenue in 2012, according to the National Indian Gaming Commission.

Taking a look at the global picture, total gaming revenue for 2012 was $430 billion, according to research by Global Betting and Gaming Consultants.

One thing all casinos have in common is the need to provide unique, interesting and addicting games to their clientele. Decks of playing cards, dice and roulette tables no longer create the same excitement as multi-million-dollar progressive jackpots and flashy electronic games. While I don't gamble myself, I know the last time I was in Las Vegas I was amazed by the gambling machine choices, mega jackpots, and general high energy, electronic gaming floor.

One of the major firms fulfilling the need for gaming machines is International Game Technology (NYSE: IGT).

IGT was knocked down recently by what I think is an ill-founded downgrade by Deutsche Bank (NYSE: DB) to "hold" from "buy." The analyst issuing the downgrade said he believes the company is balanced in terms of risk and reward for investors. His downgrade was due to the fact that he thinks future growth is already factored into the share price. 

I strongly disagree with this downgrade, and I believe the sell-off presents a great opportunity to buy shares of this global leader in casino gaming entertainment.

International Game Technology is a Las Vegas-based company that went public in 1981 and helped pioneer the concept of computerized player tracking. The company is also noted for launching the first video poker machine.  

It has since grown to a leading gaming machine maker worldwide. In its most recent quarterly results, total revenue grew by 9% to $579 million from the same period last year. The company credits North American product sales and social gaming for the increase. Social gaming revenue alone exploded 105% to $61 million from the year-ago period, and GAAP EPS ramped up 56% over the same time frame.

IGT shipped 13,400 machines during the quarter, up from 11,600 machines shipped in the same quarter a year ago, and it just secured a 7,000 machine deal with Caesars Entertainment (NASDAQ: CZR). The company boasts strong relationships with the Native American tribal casino market, and I think we can expect similar deals in the global market over the next year as well.

And then there's the huge market just getting started: online, state-sponsored casino gaming. This enables gamers to play from home in a virtual casino environment. Delaware will be the first state to launch real money games to its residents by the end of October.

IGT will be providing the infrastructure for this new type of gaming. It is very likely this state-sanctioned, at-home style electronic casino will quickly spread from state to state, resulting in additional profits for IGT. 

Looking at the chart, IGT is sitting just above minor support at $17.96. The next and major support level is the 200-day simple moving average (SMA) at $17.23. Buying now, as long as the 200-day SMA holds as support, makes technical sense.

IGT Stock Chart

Recommended Trade Setup:

-- Buy IGT at the market price
-- Set stop-loss at $16.93
-- Set initial price target at $22.67 for a potential 24% gain in nine months